What Is Meant By Bretton Woods Agreement

Geplaatst door MCautreels op 15 april 2021

In 1960, Robert Triffin, a Belgian-American economist, noted that holding dollars was more valuable than gold, because constant balance-of-payments deficits in the United States helped maintain the system in liquidity and stimulate economic growth. What was later heralded as Triffin`s dilemma was predicted when Triffin realized that if the U.S. failed to maintain its deficits, lose its liquidity, the system would not be able to keep up with global economic growth and thus shut down the system. But such payment deficits also meant that deficits over time would undermine confidence in the dollar due to the instability of the reserve currency. [33] The IMF should provide loan advances to countries with balance-of-payments deficits. Short-term balance-of-payments difficulties would be overcome by IMF loans, which would facilitate exchange rate stability. This flexibility meant that a Member State did not have to cause depression to bring its national income down to such a low level that its imports would eventually fall within its capabilities. This should avoid the need for countries to resort to conventional medicine, to embark on dramatic unemployment in the face of chronic balance-of-payments deficits. Before the Second World War, European nations – especially Britain – often used it. Theoretically, the reserve currency of the Bancor (a global monetary unit that has never been implemented) would be proposed by John Maynard Keynes; However, the United States objected and its request was accepted, so that the “reserve currency” became the U.S. dollar. This meant that other countries would link their currencies to the U.S.

dollar and, once convertibility was restored, buy and sell U.S. dollars to keep exchange rates in plus or minus 1% of parity. Thus, the U.S. dollar played the role that gold had played below the gold standard in the international financial system. [25] The agreement did not promote the discipline of the Federal Reserve or the U.S. government. The U.S. Federal Reserve expressed concern about a rise in the domestic unemployment rate due to the depreciation of the dollar. To undermine the efforts of the Smithsonian Agreement, the Federal Reserve lowered interest rates in order to pursue a pre-domestic policy objective of full national employment. With the Smithsonian agreement, member states expected the dollar to return to the United States, but lower interest rates within the United States have led the U.S. dollar to continue to flow to foreign central banks. The influx of dollars into foreign banks continued the process of monetizing the dollar abroad, beating the objectives of the Smithsonian agreement.

As a result, the price of the dollar in the goldless market continued to weigh on its official price; Shortly after the announcement of a 10% devaluation in February 1973, Japan and the EEC countries decided to let their currencies fluctuate.